The Family Constitution Guide - Taylor Wessing .The Family Constitution Guide ... The Family...
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The Family Constitution GuideAn introductory guide to Family Constitutions: their scope, impact and uses
About Taylor WessingTaylor Wessing is a leading international law firm in Europe, Asia and the Middle East.
Our clients include leading financial institutions, major corporations, public sector bodies and wealthy individuals and families.
What makes us different is our forward-thinking approach to serving clients.
We think creatively about business issues and are constantly looking for new and better ways to add value. By doing this, we come up with truly innovative solutions that help to grow our clients businesses.
Mustafa Hussain firstname.lastname@example.org
ContentsCharacteristicsWhat is a Family Constitution? ............................................. 04
PurposeWhy do families need a Family Constitution? ..................... 08
FlexibilityHow will the Family Constitution cope with change? ........ 15
ControversyWill it lessen disputes, or just create them? ......................... 16
What will a Family Constitution contain?How do we get started? ......................................................... 18The ingredients .......................................................................... 21
Concluding sectionHow do we do it? .....................................................................35
Characteristics What is a Family Constitution?
As families and family businesses develop and grow, relationships often start to become more complex, more difficult and in some cases, more fragmented. As well as personal relationships between family members (whether of the same or of a different generation) there will often be complicated relationships between the various parts of the family and its wealth structure the family businesses, the family office, and the family trustees, all of whom are intended to have some role as stewards for the preservation of the family wealth. Building and fostering a mutual understanding of the rights and responsibilities of all persons who have an interest in the family wealth is key to its preservation and growth.
An important aid to building and then preserving this clarity of vision and mutual purpose within a family dynamic, is the Family Constitution. The Family Constitution (also known as a family charter or family protocol) is a written statement that serves as a record of the familys heritage, culture, hopes and ambitions for future success, as well as a plan for how to achieve them. At its core will be the mission statement for the family and their clearly stated hopes and aspirations for the current and future generations.
The Family Constitution forms a framework that engages with the family members, family offices, family businesses, family investment companies, and family trusts. Through the principles that will be set out, all interested parties will play a vital and interlocking role in ensuring the smooth governance of the familys affairs and interests. This will strengthen the prospects of the family avoiding the kind of devastating disruption and damage that disputes or unforeseen catastrophic events can create for the family wealth.
A core priority in any family dynamic is to decide how to balance issues of control over the management of wealth with the ability or rights to enjoy the successes
and benefits that arise from that. Often legal structures (companies, foundations, trusts) will be put in place and are often desirable for a number of reasons (for example, succession planning, tax efficiency, or confidentiality). These legal forms will, to an extent, already separate out the control elements between the different interested parties; the family and non-family shareholders, the family trustees, and the different generations of the family. What the Family Constitution does is bind all these elements together in a cohesive way and with an overlying set of family principles and governance protocols that keep the different interests and parts of the family wealth structures working together efficiently and successfully.
The Family Constitution will typically set out broad principles in a number of areas such as education, communication, the scope and use of the family office,
expenditure on joint and individual projects, and the involvement of external advisers in certain of the activities carried on by the family members, family office, or family trusts. It will usually define the
persons having particular roles in relation to the family business, the family office or family trusts. It can also
include specific policies on matters such as investment, education, employment by the family business, or it can include general principles that could one day lead to such policies being formulated at an appropriate point in time. For example, it can seek to anticipate and deal with difficult situations such as the marriage breakdown of certain members of the family, or the risk that a family member becomes the black sheep of the family in that they fail to properly engage with the family office/businesses or with the ethos of the family.
It should therefore be a bespoke document, not a standard form prepared by external advisers without the intrinsic knowledge and understanding of the family dynamic and the familys core concerns. Probably the most important feature of the Family Constitution is that it should be the embodiment of the personal ethos, and closely held principles, that the family all agree between themselves to abide by in protecting and enhancing the operation of the family wealth.
PurposeWhy do families need a Family Constitution?
History shows that the vast majority of family businesses will fail before the third generation has been able to enjoy the success that has been achieved, purely because of internal conflicts rather than external events or pressures. As well as fostering rifts and tensions, families who did not have a clear mission, or clear set of values for the family members and businesses to abide by, face the risk of potentially damaging and public disputes over the governance of the family wealth structures.
Although legal structures, and clearly defined rights and responsibilities, are crucial to the well-running of the family business, they may not necessarily be sufficient to prevent damage to the family wealth by tensions, disputes and in some cases court battles. Sometimes the inflexibility of a trust or company structure, or the speed with which they can adapt to changes in the family dynamic, are insufficient to foresee or to address the problems that can arise in a family or family business dynamic. Unexpected death, or the divorce of a family member, or a substantial claim brought by a creditor against the family, the business or trustees, can paralyse a structure and produce major problems and uncertainty for the family members who have a stake in the family wealth structures.
The Family Constitution and the principles and protocols that underpin it can anticipate issues that may be faced, and foster an appropriate forum to develop a plan to deal with the issues that may arise even if they are unexpected. If the family governance forum has not successfully anticipated a particular issue, it can still be a key advantage to have the processes in place to facilitate swift and proper consideration of a problem in order to circumvent whatever unexpected problems arise.
Scenario 1: In the last decade one major global family managed to avert disastrous consequences for the family and family business through the adoption of a Family Constitution model. A multi-billion dollar global family business, with branches and factories around the world, came under immense pressure and tension as a result of a falling out between two brothers who had become jointly responsible for driving the business forward after the founder, their father, had passed away. Bitter infighting can sometimes spread like fire. Once the younger generations of the family saw the tensions and the fighting taking place, the priorities for other generations of the family shifted dramatically. Court battles involving the family members and family businesses began and came very close to jeopardising the stability, and tax efficiency, of the business and irrevocably changing the family wealth structures that had been put in place in order to protect the family wealth.
Fortunately, before the family business and family relations had been irreparably damaged, the family agreed to have confidential discussions outside of the Court process, with input from family governance specialists, lawyers and accountants, and came up with a workable framework in the form of a Family Constitution that would accommodate the different perspectives and priorities of the family, but with the business and its future stability as the primary focus.
Scenario 2: A significant North American family averted a public dispute over the operation of the family businesses and trusts because of the existence of clearly stated family governance protocols. When one of the second generation beneficiaries had a disagreement with his father, and other senior executives of the family business, he tried to begin legal proceedings in a jurisdiction that would have resulted in a public and damaging fight over his position.
He was successfully prevented from doing so because of the clearly stated family protocols that formed the essence of a Family Constitution. To the relief of many other members of the family, the risk was averted and the confidentiality